Tuesday, May 1, 2012

How to save taxation on real estate sale

A long time client of  Matthew C. Mullhofer came in to the office today with a question in regards to real estate taxation.  He was selling an apartment complex and was receiving a large amount of profit from the sale.  He had bought the apartment complex in 1990 for $200,000.00 and a little over 20 years later, he was able to sell it for $1,200,000.00.  He was aware that he was going to owe capital gains tax on his gain from this sale, and was wondering if there was any way to prevent this.

Matthew C. Mullhofer advised his client that there was a way to avoid the taxation and it was called a 1031 exchange, which prevented him from owing capital gains tax.  Mr. Mullhofer explained that a 1031 exchange has been around since 1921.  With a 1031 exchange, Matthew C. Mullhofer further explained , his client could keep his entire profit from the sale growing and working for him if he were to reinvest the money, and in doing so, he would avoid taxation. 

Matthew C. Mullhofer gave a few brief guidelines one must follow in order to have the 1031 exchange work (Mr. Mullhofer explained to meet with an exchange expert before doing anything for a more detailed guidance):
      1) It is important to select an exchange accommodator to receive the sales proceeds from the escrow company when the property sells.  If the client receives the proceeds directly and not an intermediary, then the exchange will not qualify in the transaction.  That is why it is important to complete this step before the closing date.
      2)The client has 45 days to provide a list of properties the client might buy as replacement (investment) properties to his accommodator.
3)      The client has 135 days (or 180 days from his sale date) to close escrow on one, some, or all of the properties he sent to his accommodater. 

Note: The deadlines listed are hard deadlines. They cannot be moved or extended. It does not matter if the deadline is on a holiday; it is still the date to have your obligations to be set up for. 

Matthew C. Mullhofer explained that all the equity and all the debt the down-leg property had must be replaced when completing the up-leg purchase.  For example, if the client’s $1,500,000.00 was $1,400,000.00 of equity and $100,000.00 of loan was repaid, then the debt and equity numbers on his up-leg purchase(s) must be equal or greater than these figures. 

Please feel free to contact Matthew Mullhofer Attorney at (877) 246-2770, to discuss a 1031 exchange in more detail.